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D&O rates skyrocket in hardening market

Skyrocketing rates

Policyholders are facing significant increases in their directors and officers liability insurance for the first time in several years, and some experts expect the trend to continue over the next 18 to 24 months.

Securities class actions and litigation following high-profile events are leading drivers for recent price hikes in the sector, they say.

“The D&O market’s very challenging,” said Christine Williams, New York-based CEO of Aon PLC’s financial services group. “It’s being driven primarily by an increase in securities class actions that have been filed over the past two years. We are starting to see insurers seek increases on both primary and excess layers.”

Almost one out every 11 companies is being sued, but “it’s just not conceivable” that this percentage of firms are committing fraud, said Robert A. Wolfe, New York-based executive vice president and chief underwriting officer for North American financial lines for Chubb Ltd.

Also impacting the market is D&O-related “event-driven” litigation, where plaintiff attorneys react to negative news by filing litigation. Experts say this includes the securities class actions as well as the Boeing Co. plane crashes, the PG&E Corp. wildfires, the #MeToo movement and cyber breaches, all of which have led to D&O litigation.

Insurers are “drawing firm lines about what they need to achieve on their price increases to fix books of business that might be losing money,” said Phil Norton, Chicago-based president of Arthur J. Gallagher & Co.’s professional liability division.

Most price increases are between 5% and 20% and are driven by the increase in the number of securities class action lawsuits, he said.

Rates are rising from 10% to 50%, with some “extreme outliers” seeing even higher rates, said Kevin LaCroix, executive vice president of RT ProExec, a division of R-T Specialty LLC, in Beachwood, Ohio.

In particular, firms including those with a recent initial public offering, financial troubles or a claims history “are seeing very significant increases,” he said.

Rates are up for virtually every D&O risk, with increases that can range from the high single digits to the mid-20s depending on the market, said Brian Dunphy, senior vice president and managing director at Alliant Insurance Services Inc. in New York, who oversees the brokerage’s management and professional solutions group. This reflects rates on a blended basis, including both primary and excess rates.

“Everybody’s pulling their hair out,” said Peter Taffae, a D&O liability insurance expert at Los Angeles-based wholesale brokerage Executive Perils Inc.

Health care firms in particular are experiencing 100% rate increases, he said.

In general, insurers’ “interest in new business has dwindled because they’re making so much on their renewals,” Mr. Taffae said. The underwriter’s attitude is, “take it or leave it.”

The “classic hard/soft paradigm really doesn’t exist anymore,” said Greg Spore, Chicago-based FINPRO U.S. placement leader for Marsh LLC.

There are pockets that have the characteristics of a true hard market, he said, including unicorns, which are privately held startups valued at more than $1 billion, initial public offerings, and pharmaceutical businesses with opioid exposures.

In May, 92% of Marsh clients experienced increased D&O rates, including 34% with hikes of at least 20%, Mr. Spore said.

One change in the D&O market is increased rates for excess lines, according to experts.

A year ago firms were already seeing increases in primary business, but were able to get decreases in their excess, so their overall insurance costs did not increase, Mr. LaCroix said. “That’s really changed,” with “not only primary pushing for increases, but excess holding the line as well,” he said.

Excess insurers are seeking bigger increases than primary insurers, with these “inverted towers” becoming more common, Mr. Taffae said.

Capacity for new business is “dramatically thinner than historically,” said Rob Yellen, New York-based executive vice president of Willis Towers Watson PLC’s FINEX North America practice.

Capacity is being reduced while retentions are higher, said Brian Zink, New York-based head of management liability for Zurich Insurance Group Ltd.

Policyholders with $25 million in capacity are seeing it reduced to $15 million or $10 million, while insurers are “taking action based upon market cap size and historical claims frequency, so it’s a compounding effect,” he said.

Mr. Norton said for some of the harder risks, such as younger technology companies, insurers are reluctant to offer more than $5 million “and some carriers are saying, ‘We would be more comfortable at $2.5 million.’”

Simon R. Hodge, head of executive and professional risk solutions at USI Insurance Services LLC, added, “Carriers are looking for clients to have more skin in the game,” which has resulted in a “constant demand for higher retentions“ especially for securities claims and certain market sectors, including IPOs, which is a “particularly challenging” market.

There is no immediate end in sight to the higher rates, say observers.

“For now, it does seem like the rate of increase is continuing to accelerate,” said Mr. LaCroix.

Some experts say they expect the hard market for D&O to continue for about for a couple of years.

“People are in a bit of a panic,” said Mr. Dunphy. “There’s a whole generation of professionals who haven’t experienced anything like this,” said Mr. Dunphy, who estimates the hard market will last 18 to 24 months.

However, it “would be irresponsible to try to predict the duration of a market when it’s just beginning,” said Greg Flood, New York-based president of IronPro, a unit of Liberty Mutual Insurance Co.

“It’s just going to continue until competition comes in, but there are some signs that competition is out there, just not enough for this trend to continue,” said Mr. Yellen. “If this goes the way of hard markets, it will turn fast when it does.”




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